Hercules Offshore: What a Difference Six Weeks Can Make

Approximately six weeks ago, I wrote an article in which I recommended that Hercules Offshore (HERO) was a stock that was not a timely purchase at that particular moment. The main reasons for that included falling natural gas prices, a looming hurricane season with drillers reluctant to rent rigs, and approximately a quarter of their rigs were without long term contracts.

My concerns were correct and HERO declined to approximately $25 a share. This seems to be it’s base point as it’s touched this level multiple times only to rebound. At that point several things have changed which now make me recommend HERO as a terrific value with the potential for excellent appreciation.

First, as the Wall Street Journal noted, insiders had been buying HERO shares. They have bought $1.2 million dollars in last month and $2.9 million dollars in the last year. Even more impressively, institutions have been steadily purchasing HERO’s stock and have purchased 30 million shares in the last nine months.

In addition the price of natural gas, to which the value of HERO is closely attached, has been slowly, if not steadily, increasing in value. The majority of the hurricane season is behind us with no major damage to HERO’s rigs. It seems reasonable that the number of rigs under contract may be increasing. I don’t have any direct evidence for that, but it would certainly help explain the insider and institutional buying.

In addition, the valuations are compelling. The PE is 7.64 with an operating margin of 43%. It has a return on equity of 31%. The technical charts seem to indicate an excellent point for buying.

Disclosure: I have long positions in HERO.

Comments

[LSU Tiger 76]

Hey David Wolf, you're as bad a flip flopper as that joker Jim Cramer. Whenever HERO is showing strength in the market you write about what a great value it is and how bullish you are. Then after it's shown a period of weakness, you write about how it has flaws and is not a good buy at the time. If you really want to look smart, become bullish or bearish BEFORE the momentum happens. Then you'll actually be helping people. Writing about how HERO sucks back in July after it fell from $37 to $27 doesn't help anybody. All of us longs already knew it sucked at that point! Now that it's climbing back up, you're saying how great it is again. Where were you when HERO was back at $24.50? Where was your support then? Anyone can read yesterdays newspaper David.

[dwolf]

Hi User 34665,
First of all, one needs to be accurate. My first recommendation for HERO was on June 27th, when the closing price was $33.13. My second recommendation that HERO had some more unanticipated weakness than I had expected was on August 8th, when the closing price was $28.19. This represents an approximate 15% loss. It was an incorrect recommendation, which is why I wrote my second article. HERO went on to close at a low of $25.36 on September 10th. HERO closed at approximately $27.80 on the date of my last article on September 20th.

While the price of natural gas has continued to decline, due to record supplies and the fact that we are still in a shoulder season, it is reasonable to expect that over the long term it should increase in value. Natural gas, like most commodities, should increase in value over time.

I believe that as natural gas reserves are drawn down, HERO’s margins will improve and a greater percentage of their rigs will come on line. I may or may not be right. I am comforted by the degree of insider and institutional buying, who also obviously expect that HERO stock will increase in value.

If you are a good investor, you don’t expect to be right all the time, you just wish to be right more often then you are wrong. (I have an annualized return of approximately 25% a year, for a number of years. I must be doing something right.) But an investor also needs to be willing to admit when his buys don’t work, at least at that moment.

Investing is challenging and at times, humbling. I wish you the best of luck in your investing.